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3 Income Stocks to Buy Now

September 24, 2009 – by Richard Band

Ever heard of “cash-on-cash” stocks? This is my term for an income stock with so much upside, it’s almost impossible to find on Wall Street. This type of stock is also my favorite because not only are they dividend rich in immediate returns, but allow for major capital gains.

It’s my mission to find these hidden gems and pass them on to you. If you are looking for real profits, total return investing is the way to do it. Here are three cash-on-cash stocks to start with. Each is a favorite of mine and a building block to real wealth.

Income Stock #1 – Pepsico (PEP)

In the age-old debate of Pepsi vs. Coke, Pepsico (PEP) is definitely leading right now in the stock world. How does this translate into profits for you? Let’s take a look.

In the last 10 years, PEP’s earnings per share have soared 150% compared to Coke’s 65%, signaling fantastic business growth. Pepsico also continues to benefit from its products outside of soft drinks, including snacks (Frito-Lay), sports drinks (Gatorade), fruit juices (Tropicana) and breakfast foods (Quaker).

Their efforts have certainly paid off for shareholders over the long run. PEP pays around an attractive 3% dividend and also regularly buys back stock to further boost investor returns.

I’m projecting a total return of 30% or more in the next year. Pepsico is as an excellent buy.

Income Stock #2 – Lockheed Martin (LMT)

If there’s such a thing as a recession-proof business, defense contractors is it. At the top of that list right now is Lockheed Martin (LMT), selling at 12X this year’s earnings. That’s almost 50% below the stock’s P/E from five years ago. This kind of discount provides a margin of safety if ever there was a slowdown in defense spending.

The builder of the F-22 Raptor jet has done well keeping its balance sheet in top shape. In the last 10 years, LMT has slashed its long-term debt by an astonishing 70%. Meanwhile, cash balances stand at a record $3 billion.

Even with President Obama residing in the White House, LMT will continue to post record profits for the remainder of 2009. At less than 9X next year’s project earnings and about a 3% dividend yield, the stock is cheap enough to jump 30% or more in the coming year, simply on the recognition that major defense cuts aren’t in the cards.

Income Stock #3 – Kinder Morgan Energy Partners (KMP)

Master limited partnerships (MLPs) are great income investments — not only because they currently can be had for bargain prices, but they also allow you to earn tax-deferred yields of around 6–7% while building a foundation for capital gains down the line.

One of my favorite MLPs is Kinder Morgan Energy Partners (KMP), a leading pipeline transportation and energy storage company. KMP owns over 37,000 miles of pipeline, transporting natural gas, gasoline, crude oil, CO2 and other products. I tend to favor pipeline MLPs because of their stable cash flow and healthy growth prospects.

As one of the largest publicly traded pipeline partnerships in the country, KMP has a history of solid returns. Since 1997, cash distributions per unit have skyrocketed 328%!

With a current yield of about 8%, KMP is a great buy for any income investor.